<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-28166
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WHITTMAN-HART, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3797833
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
311 South Wacker Drive, Suite 3500, Chicago, Illinois 60606-6618
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(Address of principal executive offices, including Zip Code)
(312) 922-9200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
As of July 31, 1999, there were 54,142,917 shares of common stock of the
registrant outstanding.
<PAGE>
WHITTMAN-HART, INC.
FORM 10-Q
For the quarterly period ended June 30, 1999
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 3
and December 31, 1998 (unaudited)
Consolidated Statements of Earnings and Comprehensive Income
for the three and six months ended June 30, 1999
and June 30, 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and June 30, 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission at Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHITTMAN-HART, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 62,506,530 $ 49,656,020
Short-term investments 65,716,368 70,478,919
Trade accounts receivable, net of allowance for
doubtful accounts of $1,461,105 and $1,797,631 in 1999
and 1998, respectively 68,850,439 56,321,881
Prepaid expenses and other current assets 7,714,780 3,858,396
Notes and interest receivable 262,019 168,847
Deferred income taxes 1,309,141 988,457
--------------- ---------------
Total current assets 206,359,277 181,472,520
--------------- ---------------
Property and equipment, net 52,775,298 34,862,122
Long-term investments 29,250,416 30,195,927
Deferred income taxes - 79,500
Other assets 1,378,945 1,256,106
--------------- ---------------
Total assets $ 289,763,936 $ 247,866,175
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,731,509 $ 1,988,652
Accrued compensation and related costs 31,172,022 21,610,028
Income taxes payable 408,483 2,724,015
Accrued expenses and other liabilities 7,219,949 8,820,311
Current maturities of long-term debt - 447,502
--------------- ---------------
Total current liabilities 40,531,963 35,590,508
--------------- ---------------
Deferred income taxes 443,706 879,226
Deferred rent 1,896,278 1,671,978
Deferred revenue 66,830 37,720
Long-term debt, less current maturities - 229,478
--------------- ---------------
Total liabilities 42,938,777 38,408,910
--------------- ---------------
Stockholders' equity:
Preferred stock, $.001 par value; 3,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.001 par value; 75,000,000 shares authorized,
54,017,376 and 52,082,439 shares issued and
outstanding in 1999 and 1998, respectively 54,017 52,082
Additional paid-in capital 198,417,766 173,694,055
Retained earnings 49,036,264 36,476,778
Deferred compensation (690,480) (848,628)
Accumulated other comprehensive income 7,592 82,978
--------------- ---------------
Total stockholders' equity 246,825,159 209,457,265
--------------- ---------------
Total liabilities and stockholders' equity $ 289,763,936 $ 247,866,175
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
WHITTMAN-HART, INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 111,186,752 $ 75,161,866 215,278,920 $ 139,582,003
Cost of services 62,379,245 43,665,280 121,456,167 81,652,728
-------------- -------------- -------------- --------------
Gross profit 48,807,507 31,496,586 93,822,753 57,929,275
Costs and expenses:
Selling 5,336,294 3,074,787 9,579,681 5,387,341
Recruiting 2,557,622 2,876,829 5,106,062 5,059,131
General and administrative 28,689,639 19,702,527 55,648,702 36,487,300
Business combination costs 1,634,761 - 4,286,975 383,044
-------------- -------------- -------------- --------------
Total costs and expenses 38,218,316 25,654,143 74,621,420 47,316,816
-------------- -------------- -------------- --------------
Operating income 10,589,191 5,842,443 19,201,333 10,612,459
Other income (expense):
Interest expense - (41,687) (13,465) (83,940)
Interest income 1,638,954 1,443,765 3,375,583 2,364,720
Other, net (10,829) 1,508 (10,829) 9,757
-------------- -------------- -------------- --------------
Total other income 1,628,125 1,403,586 3,351,289 2,290,537
-------------- -------------- -------------- --------------
Income before income taxes 12,217,316 7,246,029 22,552,622 12,902,996
Income taxes:
Income tax 5,190,090 3,009,422 9,966,050 5,408,003
Initial deferred income tax 467,280 - 467,280 296,048
-------------- -------------- -------------- --------------
Total income taxes 5,657,370 3,009,422 10,433,330 5,704,051
-------------- -------------- -------------- --------------
Net income 6,559,946 4,236,607 12,119,292 7,198,945
Other comprehensive income-
Foreign currency translation
adjustments 26,793 622 73,283 1,411
Unrealized depreciation of -
available-for-sale securities (118,823) - (148,669) -
-------------- -------------- -------------- --------------
Comprehensive income $ 6,467,916 $ 4,237,229 $ 12,043,906 $ 7,200,356
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Basic earnings per share $ 0.12 $ 0.08 0.23 $ 0.15
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted earnings per share $ 0.11 $ 0.08 0.20 $ 0.14
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average number of
common shares outstanding 53,487,397 49,897,330 52,921,725 48,505,292
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average number of
common and common equivalent
shares outstanding 59,299,827 54,956,578 59,620,783 53,176,118
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WHITTMAN-HART, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------
JUNE 30, JUNE 30,
1999 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,119,292 $ 7,198,945
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,661,459 1,847,470
Deferred income taxes (670,677) (219,501)
Gain (loss) on sales of investments 3,101 (9,119)
Stock-based non-cash compensation expense 1,089,835 -
Non-cash interest income 200,486 -
Unrealized holding loss on investments (60,327) -
Changes in assets and liabilities:
Trade accounts receivable, net (11,483,713) (14,449,073)
Prepaid expenses and other current assets (3,810,346) (939,851)
Other assets (66,457) -
Accounts payable (649,917) (396,380)
Accrued compensation and related costs 9,216,007 5,343,739
Income taxes payable 8,377,525 3,233,707
Accrued expenses and other liabilities (1,727,357) 2,076,701
Other, net 332,678 (495,689)
----------------- ---------------
Net cash provided by operating activities 15,531,589 3,190,949
----------------- ---------------
Cash flows from investing activities:
Purchases of investments (59,227,445) (66,991,234)
Sales and maturities of investments 64,743,830 65,550,074
Purchases of property and equipment (20,221,764) (8,367,922)
----------------- ---------------
Net cash used in investing activities (14,705,379) (9,809,082)
----------------- ---------------
Cash flows from financing activities:
Proceeds from exercise of stock options 11,885,548 7,361,681
Payment of long-term debt (1,493,998) (418,915)
S corporation distributions (425,341) (674,670)
Proceeds from issuance of common stock - 69,783,402
Proceeds from employee stock purchase plan 2,058,091 754,303
----------------- ---------------
Net cash provided by financing activities 12,024,300 76,805,801
----------------- ---------------
Net increase in cash and cash equivalents 12,850,510 70,187,668
Cash and cash equivalents at beginning of period 49,656,020 10,221,887
----------------- ---------------
Cash and cash equivalents at end of period $ 62,506,530 $ 80,409,555
----------------- ---------------
----------------- ---------------
Supplemental disclosures of cash flow information:
Interest paid $ 25,040 $ 74,749
Income taxes paid 2,355,983 1,210,150
Supplemental disclosure of noncash financing activities:
Tax benefit related to stock plans $ 10,800,774 5,008,993
Issuance of common stock for business combinations (shares) - 300,000
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Whittman-Hart, Inc. (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for quarterly reports on
Form 10-Q and do not include all of the information and note disclosures
required by generally accepted accounting principles. The information furnished
herein includes all adjustments which are, in the opinion of management,
necessary for a fair presentation of results for these interim periods, and all
such adjustments are of a normal recurring nature. The results of operations for
the three and six months ended June 30, 1999 are not necessarily indicative of
the results to be expected for the year ending December 31, 1999.
As described in Note 2, the Company acquired The Waterfield Technology
Group ("Waterfield") in March 1999. The merger was accounted for under the
pooling-of-interests method of accounting and, accordingly, the historical
financial statements of the Company have been restated to include the financial
position and results of operations of Waterfield for all periods presented.
These financial statements should be read in conjunction with the Company's
historical audited consolidated financial statements and notes thereto for the
year ended December 31, 1998, included in the Annual Report on Form 10-K filed
by the Company with the Securities and Exchange Commission.
2. BUSINESS COMBINATIONS
During March 1998, the Company issued 600,000 shares of its common stock
in exchange for all of the outstanding capital stock of QCC, Inc. ("QCC").
Headquartered in the Boston metropolitan area, QCC's approximately 75
professionals provided the following services: package software evaluation;
business process reengineering; data warehousing; implementation of software
packages developed by SSA-Registered Trademark-, Oracle-Registered
Trademark-, and JDEdwards-Registered Trademark-; application development for
AS/400 and client server applications; and Year 2000 compliance services.
This business combination has been accounted for as a pooling-of-interests
combination. The stockholders' equity and operations of QCC were not material
in relation to those of the Company. As such, the Company has recorded the
combination without restating prior periods' consolidated financial
statements to reflect the pooling-of-interests combination. In connection
with the acquisition of QCC, the Company recorded deferred income tax expense
related to the establishment of deferred income tax assets and liabilities
which arose due to the change in tax status from an S corporation to a C
corporation.
6
<PAGE>
During July 1998, the Company issued 638,508 shares of its common stock in
exchange for all the outstanding capital stock of North Central Consulting
("NCC"), a Minneapolis-based IT services firm. The transaction was accounted for
as a pooling-of-interests combination and, accordingly, the Company's historical
consolidated financial statements have been restated to include the accounts and
results of operations of NCC for all periods presented. Headquartered in
Minnetonka, Minnesota, with a satellite office in Milwaukee, NCC's approximately
120 professionals specialized in providing ERP software implementations, custom
application development and internet-enabled solutions to middle-market
manufacturing, distribution and financial services companies, as well as some
divisions and departments of Fortune 500 companies. The combination of
Whittman-Hart's opened Minneapolis branch with approximately 40 employees and
NCC's four-year-old office accelerated Whittman-Hart's ability to provide a
full-suite of IT services to its target customer base.
On March 9, 1999, the Company acquired all of the outstanding stock of the
Waterfield Technology Group ("Waterfield") a Boston-based IT services firm and
strategic business partner of Kurt Salmon and Associates, a global consulting
firm, in exchange for 576,074 shares of the Company's common stock. Headquarted
in Lexington, Massachusetts, with a branch office in Parsippany, New Jersey,
Waterfield's approximately 90 employees specialize in client server and
internet-enabled application development. They have extensive experience with
Java and Java-based tools, Powerbuilder and the Microsoft suite of products.
This business combination was accounted for as a pooling-of-interests
combination and, accordingly, the Company's historical consolidated financial
statements have been restated to include the accounts and results of operations
of Waterfield for all periods presented.
On May 20, 1999, the Company issued 474,650 of its common shares in
exchange for all the outstanding capital stock of POV Partners, Inc. ("POV") an
Ohio-based IT services firm. Headquartered in Columbus, Ohio, with offices in
Phoenix, AR, and Charlotte, N.C., POV's approximately 90 employees provided a
broad range of business strategy and IT services including Internet-enabled
application development and electronic commerce solutions. This business
combination has been accounted for as a pooling-of-interest combination. The
stockholders' equity and operations of POV were not material in relation to
those of the Company. As such, the Company has recorded the combination without
restating prior periods' consolidated financial statements.
3. STOCKHOLDERS' EQUITY
On May 8, 1998, the Company completed an offering of its common stock in
which an additional 3,400,000 shares were sold by the Company, resulting in net
proceeds to the Company of $69.6 million.
In July 1998, the Board of Directors approved a 2-for-1 split of the
Company's common shares. Stockholders received one additional common share for
every share held on the record date of July 12, 1998. All of the per share data,
as appropriate, reflect this split.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Whittman-Hart's revenues are generated primarily from professional fees,
which are generally billed at a contracted hourly rate and are recognized as
services are provided. Over the last three fiscal years, at least 90% of the
Company's revenues have been generated on a time and materials basis. The
Company's services may also be provided on a fixed-bid or fee-capped basis, in
which case revenues are recognized by the percentage of completion method. These
arrangements subject the Company to the risk of cost overruns; however,
historically, such overruns have not been significant. The Company typically
bills on a weekly basis to monitor client satisfaction and manage its
outstanding accounts receivable balances. The Company's most significant cost is
project personnel cost, which consists of consultant salaries and benefits.
Thus, the Company's financial performance is primarily based upon billing margin
(billable hourly rate less the consultant's hourly cost) and personnel
utilization rates (billable hours divided by paid hours).
To date, the Company has been able to maintain its billing margins by
offsetting increases in consultant salaries with increases in its hourly rates.
Because most of the Company's engagements are on a time and materials basis,
increases in its cost of services are generally passed along to the Company's
clients and, accordingly, do not have a significant impact on the Company's
financial results. In addition, the Company attempts to control expenses that
are not passed through to its clients. Furthermore, profitability is improved by
tying significant incentive compensation to achieving performance goals.
The Company establishes standard billing guidelines based on the type of
service offered. Actual billing rates are established on a project-by-project
basis and may vary from the standard guidelines. Over the last three years, the
Company's average revenue per assignment hour has steadily increased. The growth
in average revenue per assignment hour reflects a higher percentage of
value-added services, such as package software implementations and
solutions-oriented, strategic consulting projects.
Whittman-Hart manages its personnel utilization rates by monitoring project
requirements and timetables. The number of consultants assigned to a project
will vary according to the size, complexity, duration and demands of the
project. Project terminations, completions and scheduling delays may result in
periods when consultants are not fully utilized. An unanticipated termination of
a project could result in a higher than expected number of unassigned
consultants or, if the Company were to terminate such consultants, increased
severance expenses. Although the number of the Company's consultants can be
adjusted to correspond to the number of active projects, Whittman-Hart must
maintain a sufficient number of senior consultants to oversee existing client
projects and assist the Company's sales force in securing new client
assignments. Whittman-Hart consultants are subject to employment-at-will
contracts, which may be terminated upon two weeks' notice without substantial
penalty or further expense to the Company.
Historically, the Company's revenue growth has been attributable to the
addition of new clients and the growth of current client relationships at
existing and new branch locations. During 1997, 1998 and early 1999, the Company
supplemented its internal revenue growth with acquisitions. During the remainder
of 1999, the Company intends to grow its existing branch locations and expand
its network through the traditional greenfield approach supplemented by
acquisitions. Each of the branches, originally developed by the Company, has
generated annual revenue and gross profit growth since inception.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated,
selected consolidated statements of earnings and
comprehensive income data as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF EARNINGS AND
COMPREHENSIVE INCOME DATA:
Revenues 100 % 100 % 100 % 100 %
Cost of services 56 58 56 59
------------ ------------ ------------ ------------
Gross profit: 44 42 44 41
Costs and expenses:
Selling 5 4 4 4
Recruiting 2 4 2 4
General and administrative 26 26 26 26
Business combination costs 1 * 2 -
------------ ------------ ------------ ------------
Total costs and expenses 34 34 34 34
------------ ------------ ------------ ------------
Operating income 10 8 10 7
Other income 1 2 2 2
------------ ------------ ------------ ------------
Income before income taxes: 11 10 12 9
Income taxes 5 4 5 4
Initial deferred income taxes * - * *
------------ ------------ ------------ ------------
Total income taxes 5 4 5 4
------------ ------------ ------------ ------------
Net income 6 % 6 % 7 % 5 %
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
*- Less than 1% of total revenues.
REVENUES. Revenues increased $36.0 million to $111.2 million for the three
months ended June 30, 1999 from $ 75.2 million for the three months ended June
30, 1998. Revenues for the six months ended June 30, 1999 increased $75.7
million to $215.3 million from $139.6 million for the six months ended June 30,
1998. The increases were attributable to the addition of new clients and the
growth of current client relationships at existing and new branch locations.
Revenues from the Company's ten most significant clients grew by 34%, but as a
percentage of total revenues decreased to 12% for both the three and six month
periods ended June 30, 1999 as compared to 14% for the comparable periods in the
prior year.
GROSS PROFIT. Gross profit consists of revenues less cost of services,
which includes consultant salaries and benefits. Gross profit as a percentage of
revenues was 44% for both the three and six month periods ended June 30, 1999 as
compared to 42% and 41% during the comparable periods in 1998. These increases
were attributable to a change in the sales mix toward higher-end service
offerings and the Company's established branches reaching critical mass,
partially offset by lower margins in recently opened branches.
9
<PAGE>
SELLING EXPENSES. Selling expenses include the salaries, benefits,
commissions, travel, entertainment and all other direct costs associated with
the Company's direct sales force. Selling expenses for the three months ended
June 30, 1999 increased 74% to $5.3 million from $3.1 million for the three
months ended June 30, 1998. Selling expenses for the six months ended June 30,
1999 increased 78% to $9.6 million from $5.4 million for the six months ended
June 30, 1998. These increases were attributable to higher commissions, an
increased fixed cost structure related to newly acquired offices and business
development initiatives, and other costs associated with the increase in
revenues. As a percentage of revenues selling expenses in the second quarter of
1999 increased to 5% from 4% in the second quarter of 1998 due primarily to the
increased fixed cost structure related to newly acquired and newly opened
offices. For the six months ended June 30, 1999 and 1998, selling expenses as a
percentage of revenues selling expenses remained at 4%.
RECRUITING EXPENSES. Recruiting expenses consist of costs related to hiring
new personnel. These costs include the salaries, benefits, bonuses and other
direct costs of in-house recruiters, outside recruiting agency fees, sign-on
bonuses, relocation fees and advertising costs. Recruiting expenses for the
three months ended June 30, 1999 decreased 11% to $2.6 million from $2.9 million
for the three months ended June 30, 1998. Recruiting costs for the six month
periods ended June 30, 1999 and 1998 remained constant at $5.1 million. The
number of employees increased 34% to approximately 3,350 at June 30, 1999, from
2,500 at June 30, 1998. Total recruiting costs per hire were in line with the
historical average of $5,000 to $7,000 for the three months and six month
periods ended June 30, 1999 and June 30, 1998. As a percentage of revenues,
recruiting expenses fell to 2% for the three and six month periods ended June
30,1999 as compared to 4 % for the three and six month periods ended June 30,
1998 due largely to the leveraging of fixed recruiting overhead on a higher
revenue base. As of June 30, 1999, approximately 77% of the Company's total
employees were consultants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include salaries and benefits of management and support personnel, facilities
costs, training, travel, outside professional fees and all other branch and
corporate costs. General and administrative expenses for the three month period
ended June 30, 1999 increased 46% to $28.7 million from $19.7 million for the
three months ended June 30, 1998. For the six month period ended June 30, 1999
general and administrative costs increased 53% to $55.7 million from $36.5
million for the six month period ended June 30, 1998. As a percentage of
revenues, general and administrative expenses remained constant at 26% for the
three and six month periods ended June 30, 1999 and 1998.
BUSINESS COMBINATION COSTS. Business combination costs were $1.6 million for
the three months ended June 30, 1999. No business combination costs were
incurred during the three month period ended June 30, 1998. For the first six
months of 1999 business combination costs totaled $4.3 million as compared to
$0.4 million for the same period in the prior year. As a percentage of revenue,
business combination costs accounted for both 1% and 2% of revenues for the
three and six month, periods ended June 30, 1999, respectively, and less than 1%
for the three and six month periods ended June 30, 1998. The business
combination costs included legal, accounting, other transaction-related fees and
expenses, severance payments and expenses resulting from non-cash compensation
related to stock options. During the first six months of 1999, these costs
related to the Company's acquisition of the Waterfield Technology Group
("Waterfield") in March 1999 and POV Partners, Inc. ("POV") in May 1999. In the
first six months of 1998, the Company incurred similar costs in connection with
the acquisition of QCC Incorporated ("QCC") during March of 1998.
10
<PAGE>
OPERATING INCOME. Operating income increased 81% to $10.6 million for the
three months ended June 30, 1999 from $5.8 million in the three months ended
June 30, 1998. For the six months ended June 30 1999 operating income increased
81% to $19.2 million from $10.6 million for the six months ended June 30, 1998.
As a percentage of revenues, operating income improved to 11% before business
combination costs for both the three and six months ended June 30, 1999, due to
increased gross profit and lower recruiting costs. As a percentage of revenues
after business combination costs, operating income was 10% for the three and six
months ended June 30,1999, as compared to 8% and 7% for the comparable periods
in the prior year.
OTHER INCOME. Other income increased 16% to $1.6 million for the three
months ended June 30, 1999 from $1.4 million for the three months ended June 30,
1998. For the six month period ended June 30, 1999 other income increased 46% to
$3.4 million from $2.3 million for the six month period ended June 30,1998. The
six month period ended June 30, 1999, included increased interest income on
investments related to the net proceeds of $69.6 million from the Company's
public offering in May 1998.
INCOME TAXES. The Company's effective tax rate before non-deductible
business combination costs for the three and six months ended June 30, 1999 was
42% compared to 40% for the three and six months ended June 30, 1998. The
increase in the effective tax rate relates primarily to higher state tax rates
of newly opened branch offices. The Company's effective tax rate including
non-deductible business combination costs was 46% for the three and six months
ended June 30, 1999 as compared to 42% and 44% for the three and six months
ended June 30, 1998, respectively. The effective tax rate for the three and six
months ended June 30, 1999 reflects non-deductible business combination costs
related to the acquisition of Waterfield and POV and initial deferred income
taxes related to POV. The effective tax rate for the six months ended June 30,
1998 includes non-deductible business combination costs and the recording of
initial deferred income tax expense related to the acquisition of QCC.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had approximately $157.5 million of cash,
cash equivalents, and short-term and long-term investments compared to $150.3
million at December 31, 1998. The Company's primary source of liquidity has been
cash provided through equity offerings and cash from operations. On April 30,
1999 the Company renewed its loan agreement with American National Bank
permitting borrowing up to $10.0 million of unsecured credit with interest, at
the Company's option, at LIBOR plus 1.5% or the lender's prime rate. There were
no borrowings under this loan agreement as of June 30, 1999. The Company's loan
agreement expires on April 30, 2000.
On May 8, 1996, the Company completed an initial public offering of its
common stock, which resulted in net proceeds to the Company of $37.8 million. A
portion of the proceeds from the offering were used to retire the Company's term
loan facilities. On August 27, 1996, the Company completed a public offering of
its common stock, resulting in net proceeds to the Company of $27.8 million. On
May 8, 1998, the Company completed another public offering of its common stock,
resulting in net proceeds to the Company of $69.6 million.
Operating activities provided net cash flows of $15.5 million for the six
months ended June 30, 1999 primarily as a result of increases in net income,
accrued compensation and income taxes payable which was partially offset by an
increase in accounts receivable.
11
<PAGE>
Capital expenditures were $20.2 million for the six month periods ended
June 30, 1999, which included approximately $8.7 million of purchases relating
to facilities to house the Company's education center, Chicago branch office,
and to provide space for its corporate headquarters. In addition, the Company
incurred $8.1 million of capital expenditures related to the implementation of
the Company's new information system, and the remainder was for computer
equipment and software, and office furniture and equipment to support the growth
and expansion of the Company.
During the six months ended June 30, 1999 and 1998, cash provided by
financing activities from the exercise of stock options aggregated $11.9 million
and $7.4 million, respectively.
As of June 30, 1999 the Company had approximately $157.5 million of cash
equivalents, and short and long-term investments resulting principally from cash
provided by operations and public stock offerings during the last three years.
The Company believes that these funds and those generated from the operation
will provide adequate cash to fund its anticipated cash needs at least through
the next 12 months.
ACQUISITIONS
On March 9, 1999, the Company acquired the Waterfield Technology Group
("Waterfield") a Boston-based IT services firm and strategic business partner of
Kurt Salmon and Associates, a global consulting firm, for 576,074 shares of the
Company's common stock. Headquarted in Lexington, Massachusetts, with a branch
office in Parsippany, New Jersey, Waterfield's approximately 90 employees
specialized in client server and internet-enabled application development. They
have extensive experience with Java and Java-based tools, Powerbuilder and the
Microsoft suite of products. This business combination was accounted for as a
pooling-of-interests combination and, accordingly, the Company's historical
consolidated financial statements have been restated to include the accounts and
results of operations of Waterfield for all periods presented.
On May 20, 1999, the Company issued 474,650 of its common shares in
exchange for all the outstanding capital stock of POV Partners, Inc. ("POV") an
Ohio-based IT services firm. Headquartered in Columbus, Ohio, with offices in
Phoenix, Ariz., and Charlotte, N.C., POV's approximately 90 employees provided a
broad range of business strategy and IT services including Internet-enabled
application development and electronic commerce solutions. This business
combination has been accounted for as a pooling-of-interests combination. The
stockholders' equity and operations of POV were not material in relation to
those of the Company. As such, the Company has recorded the combination without
restating prior periods' consolidated financial statements.
YEAR 2000
The Company has identified three issues related to Year 2000 compliance;
first is the effect on internal information systems, second are issues related
to vendors performing services for the Company, and finally are the issues
related to consulting activities performed by the Company.
The Company is in the process of replacing its existing internal
information systems. The system replacement was part of a strategic initiative
and was not accelerated to address Year 2000 issues. This initiative is expected
to be completed in the fourth quarter of 1999. A contingency plan exists to make
existing systems Year 2000 compliant in the unlikely event the new systems'
implementation cannot be completed. The cost of this implementation is not
expected to have a material adverse impact on the Company's results of
operations or financial condition.
12
<PAGE>
The Company has relationships with several vendors who provide
administration of compensation and related employee benefits and other vendors
who perform banking and treasury services. The Company has completed an
evaluation of the state of readiness of these vendors and it believes that the
vendors are currently Year 2000 compliant or will become compliant during 1999.
Contingency plans are in place to administer employee compensation and benefits
in the event of non-compliance by any of these vendors. The cost to the Company
in the event of non-compliance with Year 2000 issues by any of these third
parties is not expected to have material impact on the Company's result of
operations or its financial condition.
The Company believes that many middle-market companies have yet to achieve
Year 2000 compliance. To resolve the Year 2000 issue, many companies are
electing to install new package software applications, rather than modify
existing systems, thus creating significant demand for package software-related
services such as those provided by the Company. Consequently, the Company
believes that companies' need to address their Year 2000 compliance is creating
significant demand for IT products and services such as those provided by the
Company. There can be no assurance that the passage of the Year 2000 will not
have a material adverse effect on the demand for the Company's services. The
Company provides solutions for the IT systems that are critical to
companies' operations. Business interruptions, loss or corruption of data or
other major problems resulting form the failure of a client's IT system to
process year 2000 data correctly could have a significant adverse consequences
to that client. The Company cannot currently predict whether or to what extent
there will be any legal claims brought against the Company or whether there will
be any other material adverse effect on the Company's business, financial
condition or the results of operations, as a result of any such adverse
consequences to its clients.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS" No. 133) is effective
for financial statements for fiscal years beginning after June 15, 2000, but may
be adopted in earlier periods. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities. The Company does
not believe that SFAS No. 133 will have a significant impact on its financial
statements.
SAFE HARBOR PROVISION
This Form 10-Q contains certain forward-looking statements (as defined in
Section 21E of the Securities Exchange Act of 1934, as amended) that involve
substantial risks and uncertainties. When used in this Form 10-Q, the words
"plans", "intends", "anticipates", and "expects" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results, performance or
achievements expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, difficulties in attracting and retaining highly skilled employees,
the Company's ability to manage rapid growth and expansion into new geographic
areas and service lines, the Company's ability to manage the risk associated
with client projects and risks related to possible acquisitions, the Company's
ability to develop IT solutions that keep pace with continuing changes in
technology, evolving industry standards and changing client preferences. In
addition, the Company's ability to manage issues relating to the passage of Year
2000, as discussed in the section entitled "Year 2000", of the "Management
Discussion and Analysis of Financial Condition and Results of Operations.
13
<PAGE>
These and other risks are more fully described in the "Risk Factors"
section of the Company's registration statement (No.333-82491) on Form S-3 filed
by the Company with the Securities and Exchange Commission on July 8, 1999, as
amended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company maintains investments in marketable securities. The securities
are classified as available for sale on the consolidated balance sheet at fair
value, with unrealized gains and losses reported as a separate component of
stockholders' equity, net of applicable deferred income taxes. As of June
30,1999, the fair value of the Company's marketable securities portfolio was
$95.0 million, all of which was invested in debt securities.
The Company operates its only non-U.S. office in London, England, which
exposes the Company to market risk associated with foreign currency exchange
rate fluctuations; however, such risk is immaterial at this time to the
Company's consolidated financial statements.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 20, 1999, the Company acquired all of the outstanding capital
stock of POV from the shareholders of POV, in exchange for 474,650 shares of the
Company's Common Stock. The shares of Common Stock were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933. There were no underwriters or other distributors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on May 20, 1999.
(b) The Stockholders voted to elect one directors of the first class of
the Company's Board of Directors.
<TABLE>
<CAPTION>
DIRECTORS FOR AGAINST ABSTAIN NON-VOTES
- --------- ------------ --------- --------- -----------
<S> <C> <C> <C> <C>
Robert F. Bernard 36,369,948 -- 41,435 --
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated May 10, 1999 to report
revenues and net income of Whittman-Hart, Inc. for the month of April 1999
(Item 5 of Form 8-K).
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Whittman-Hart, Inc.
Date: August 10, 1999 By: /s/ Robert F. Bernard
--------------------- -------------------------------
Robert F. Bernard
Chairman of the Board and
Chief Executive Officer
Date: August 10, 1999 By: /s/ Bert B. Young
--------------------- -------------------------------
Bert B. Young
Chief Financial Officer and Treasurer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATMENT OF EARNINGS AND COMPREHENSIVE INCOME FOR THE THREE AND
SIX MONTHS ENDED JUNE 30, 1998 WERE RESTATED FOR THE ACQUISITIONS OF NCC AND
WATERFIELD ACCOUNTED FOR AS A POOLING OF INTERESTS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 80,409 80,409
<SECURITIES> 60,190 60,190
<RECEIVABLES> 54,079 54,079
<ALLOWANCES> 921 921
<INVENTORY> 0 0
<CURRENT-ASSETS> 199,071 199,071
<PP&E> 31,165 31,165
<DEPRECIATION> 7,861 7,861
<TOTAL-ASSETS> 224,187 224,187
<CURRENT-LIABILITIES> 30,186 30,186
<BONDS> 414 414
0 0
0 0
<COMMON> 52 52
<OTHER-SE> 190,648 190,648
<TOTAL-LIABILITY-AND-EQUITY> 222,698 222,698
<SALES> 0 0
<TOTAL-REVENUES> 75,162 139,582
<CGS> 0 0
<TOTAL-COSTS> 43,665 81,653
<OTHER-EXPENSES> 25,654 47,317
<LOSS-PROVISION> 509 572
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 7,246 12,903
<INCOME-TAX> 3,009 5,704
<INCOME-CONTINUING> 4,236 7,199
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,236 7,199
<EPS-BASIC> 0.08 0.15
<EPS-DILUTED> 0.08 0.14
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATMENT OF EARNINGS AND COMPREHENSIVE INCOME FOR THE THREE AND
SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 62,507
<SECURITIES> 65,716
<RECEIVABLES> 70,311
<ALLOWANCES> 1,461
<INVENTORY> 0
<CURRENT-ASSETS> 206,359
<PP&E> 65,384
<DEPRECIATION> 12,609
<TOTAL-ASSETS> 289,764
<CURRENT-LIABILITIES> 40,352
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 246,771
<TOTAL-LIABILITY-AND-EQUITY> 289,764
<SALES> 0
<TOTAL-REVENUES> 215,278
<CGS> 0
<TOTAL-COSTS> 121,456
<OTHER-EXPENSES> 74,621
<LOSS-PROVISION> 1,425
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,522
<INCOME-TAX> 10,433
<INCOME-CONTINUING> 12,119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,119
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.20
</TABLE>
